Rosenthal: Illinois has to get down to business

With $96.8 billion unfunded pension, many executives would agree that state is bad investment

March 17, 2013|Phil Rosenthal

Lawmakers at the state Capitol need to find the political will to rein in Illinois’ $96.8 billion unfunded pension. (E. Jason Wambsgans, Chicago Tribune)

Its previous two chief executives went to prison on felony convictions. It just reached a settlement with the Securities and Exchange Commission over allegations of securities fraud. Not one of its peers has a worse credit rating. On top of around $8 billion in unpaid bills, it has a $96.8 billion unfunded pension liability and no plan to significantly deal with it.

If the state of Illinois were a business, who would consider it a good investment? Little wonder good businesses would want to think long and hard whether to invest in Illinois.

When I asked analyst Jon Najarian of Chicago-based OptionMonster what he and his fellow stock watchers on CNBC's "Fast Money" would say about a company if it were in Illinois' distressed condition, he described a ship on course for certain disaster, full-speed ahead: "We can't just rearrange the deck chairs on the Titanic. We've got to get a skipper that knows to stay the heck away from the icebergs and runs a tight ship."

The SEC nailed the state for not being as c-worthy — "c" standing for credit — as it led bond buyers to believe when hawking bonds from 2005 to early 2009, a problem the state has addressed in the intervening years, in part, by improving the disclosures in the pension section of its bond offering documents.

It hardly matters that Illinois neither admitted nor denied the SEC allegation it misled investors, consenting to cease and desist from committing or causing any violations of federal securities law. The damage to the state from the SEC wrist-slap — four years after the fact — is largely reputational, but still serious. It's a broadcast reminder of all that hasn't been remedied. The nation's largest unfunded pension liability grows ever more ominous in the absence of the political will needed to rein it in.

"The SEC shined a bright light on just how out of the ordinary Illinois' approach to funding its pensions is and how significant the fiscal crisis is," said Laurence Msall, president of the Civic Federation, an independent, nonpartisan government research organization that's been taking stock of Chicago and Illinois since 1894.

"What is really frustrating … particularly the regular citizens, is the lack of urgency by our General Assembly in addressing this problem," Msall said. "Instead, we listen to a myriad of explanations from our elected officials of how hard it is and why it's so difficult to address pension reform and cut the unfunded liability."

The continued lack of a battle plan on the pension problem weighs on businesses considering investment in Illinois facilities and workers. That cost compounds, along with the interest on the debt of the unfunded pensions and the benefits that increase 3 percent per year. Too many unknowns make calculation of return on investment too much of a guess. Never mind the quality of life issues that draconian budget cuts or higher taxes might bring.

There's not necessarily a big announcement. But jobs wind up in other states.

"When it comes to Illinois, (business leaders) can't predict what the government is going to do next," Msall said. "They know it has this huge unfunded liability. They know it will have to be addressed eventually. But because they don't know (how and when), they exclude Illinois from consideration because they can't justify to their board of directors or their owners why they're investing in this state."

The average state pension in this country is 75 percent funded, which is of debatable adequacy. Illinois' five main public-worker pension funds, meanwhile, are only 40 percent funded. The General Assembly here enacted a plan in 1995 with the stated goal of bumping that figure to 90 percent over the next 50 years.

Unfortunately, the SEC said, the plan "structurally underfunded the state's pension obligations and backloaded the majority of pension contributions far into the future." Being that wrong isn't a crime. Not disclosing it to potential bond buyers is asking for trouble, though. The good news, to the extent that there is good news, is that those who deal in bonds already know enough of Illinois' financial quagmire to make the SEC findings unlikely to affect their appraisal of the state's offerings.

"Most analysts and investors think they already know the bad news about the state's pension funding levels ... (and) believe that Illinois has time to get its fiscal house in order," said Mike Stanton, publisher of the Bond Buyer, a publication devoted to municipal finance. "That said, they'd certainly be happier if the state's political structure was making more progress towards achieving long-term balance."

Moody's Investors Service's Weekly Credit Outlook for U.S. public finance called the SEC action "a credit positive for the municipal securities market as a whole" because greater scrutiny will push state and local governments "to continue improving their pension-related disclosure."